Workforce Housing Finance: It Takes a Village

The U.S. housing shortage isn’t just squeezing very low- and low-income households. Middle-income households are feeling the pain as well, but there’s less financial support for those residents and the developers who want to serve them.

The vast majority of very low- and low-income households are considered “cost-burdened,” spending more than 30 percent of their income on housing, while a quarter of middle-income households—generally those that earn more than 80 percent but less than 120 percent of area median income—are in a similar fix, according to the National Low-Income Housing Coalition in 2024.

Meanwhile, finding housing at a price point lower than the most expensive properties is a challenge around the country. Nationally, the number of renter households rose by 514,000 in 2023, the largest annual increase since 2016, according to the Census Bureau’s Housing Vacancy Survey. The number of renter households has been going up consistently as income growth has lagged behind the rising cost of for-sale homes, leaving many middle-income households as renters “not-by-choice.”

“The scarcity of affordable housing is a pressing concern,” said Berkadia Senior Vice President & Head of Fannie Mae Originations Emily Schultz. “Traditionally, the responsibility for providing affordable housing has largely fallen on ‘Big A’ affordable owners and operators—those who collaborate with government agencies through programs like LIHTC or Section 8.”

More recently, however, with Fannie Mae and Freddie Mac taking the lead, new finance initiatives aim to engage conventional owners and operators in building and preserving workforce housing, she added. New state and local initiatives also support “missing middle” developers. And jurisdictions are attempting to smooth out other parts of the process.

“More needs to be done to address the cost and timing for things like zoning and permitting,” said Rick Wolf, executive vice president of agency production for Greystone. “But we’re encouraged that there’s a greater awareness of the critical need for workforce housing.”

Workforce housing capital stacks

Putting together a capital stack for workforce apartments is usually a complex process, but it has been made even more challenging due to higher interest rates and extra caution on the part of banks.

“The capital stack for market-rate workforce housing has been affected by the current turbulent capital markets environment,” according to Sadie Thille, director of people and culture for Greenlight Communities, an affordable housing developer.

The company’s most recent project, the 229-unit Cabana Kyrene in Tempe, is the first workforce-focused attainable housing development in south Tempe since the Great Financial Crisis, according to the company. It’s designed to be affordable for teachers, service workers, health-care professionals and others in that income range.

“We’re seeing capital stacks that start with construction loans, usually from local or regional banks, in the 50 to 60 percent loan-to-cost range. The range is much lower than (it was) during the last cycle,” shared Thille.

To bridge the gap between the construction loan and equity, lenders are entering the market with higher-priced mezzanine debt/preferred equity products, noted Thille. Providing a higher cost of capital, often with profit participation, these lenders will take the capital stack up to 75 to 80 percent.

“With institutional equity continuing to sit on the sidelines, the remaining capital stack is provided by individuals, sponsors and syndications,” highlighted Thille.

Building the capital stack for workforce housing requires creative structuring, noted Priority Capital Advisory President Zachary Streit.

“Traditional sources like senior bank debt, agency financing and LIHTC equity remain critical, but developers are turning to new solutions to fill funding gaps—debt fund loans, specialty workforce housing bank loans, preferred equity and Opportunity Zone equity,” he said. “Despite market challenges, capital is available for well-structured deals.”

Subordinate financing options help developers fill funding gaps between senior debt and equity, allowing for higher leverage and flexibility in the capital stack, according to David Zipparo, a brokerage associate at Avison Young.

“Another solution is C-PACE financing, which provides long-term, fixed-rate financing for energy-efficient improvements, and which can be incorporated into the capital stack to enhance project sustainability and reduce operating costs,” he proposed.

Public-private partnerships are also an avenue for building the workforce capital stack. A nonprofit or government organization can offset the losses for the units allocated for workforce/affordable housing within a larger housing project, said Zipparo.

At The Legacy at Paw Creek in Charlotte, N.C., the nonprofit Ascension Community Development Corp. is building 89 townhomes, duplexes and triplexes. Seventy percent of the units will be market-rate, and the remaining 30 percent will be less expensive. The nonprofit will offset its losses on attainable homes through the market-rate sales.

Fannie Mae & Freddie Mac Workforce Initiatives

Fannie Mae’s Sponsor Dedicated Workforce and Sponsor Initiated Affordability programs impose rent and, in some cases, income restrictions for the life of the loan. These restrictions apply at the loan level only, meaning they disappear upon sale, refinancing or loan payoff. Annual third-party audits verify compliance with rent and income restrictions.

SDW provides pricing and underwriting flexibility that incentivizes the creation or preservation of units affordable to residents earning between 80 and 120 percent of area median income. SIA incentivizes units affordable to those earning 80 percent of AMI or less. While the GSEs do not provide development lending, they do provide permanent financing or refinancing for existing properties.

In both programs, greater affordability commitments, through a higher percentage of restricted units or deeper rent restrictions, result in enhanced pricing and structuring benefits.

The Fannie Mae programs are particularly attractive with traditional affordable borrowers, especially those with properties where LIHTC or Section 8 agreements are expiring but who wish to maintain affordable rents, or for impact funds already imposing rent and income restrictions, according to Berkadia Senior Vice President & Head of Fannie Mae Originations Emily Schultz.

The SDW program functions as a streamlined version of SIA. While SDW maintains the same rent restrictions, it does not impose mandatory income restrictions. The audit process is simplified, requiring only a rent roll review by the lender servicer, making it ideal for conventional borrowers whose leasing staff may be unfamiliar with income verification procedures, Schultz said.

For owners focused on workforce housing, these programs offer a viable alternative to the complex and time-intensive process of securing government subsidies, allowing for more immediate contributions to the availability of workforce housing, Schultz said.

For its part, Freddie Mac works with lenders and syndicators to create and preserve rental affordability through loan programs and Low-Income Housing Tax Credits equity investments. That includes workforce housing.

Freddie Mac’s Workforce Housing Preservation program is available on all fixed-rate permanent loans that the GSE underwrites with terms of seven years or more.

The preservation period is the lesser of the term of the loan or 10 years. During that period, owners set aside a percentage of units and rent affordability level that varies by market, but with a minimum of 20 percent of units affordable to workforce residents.

Rent restrictions under the program are governed by the loan agreement, with annual borrower certification to ensure continued affordability. No income tests are required for residents under the program.

Public support for workforce housing

Without public support at various levels of government, workforce housing isn’t much more feasible than lower-income affordable housing, said Nick Rojo, co-founder of Affiliated Development. Fortunately, various new initiatives have come on line recently, and more are expected.

“Our capital stack and gap funding needs vary from project to project, but the one constant is the need for local government support,” said Nick Rojo, co-founder of Affiliated Development. “There is no blueprint for developing workforce housing. It must be a collaborative process with our public partners providing monetary or property tax incentives or density bonuses to allow for the project to be financially feasible.”

Though now is an uncertain time for any federal or federal-adjacent program, initiatives from Fannie Mae and Freddie Mac are still key when it comes to supporting workforce housing.

“These programs offer pricing and structuring incentives in exchange for designating a portion of units as workforce units,” Schutz said. “Typically, this starts at 20 percent of units affordable at 80 percent AMI, or up to 120 percent AMI in high-cost markets, for the duration of the loan. Borrowers must implement these restrictions within 12 months of loan origination.”

Fannie Mae provides two workforce housing programs: Sponsor Initiated Affordability and Sponsor Dedicated Workforce (see sidebar). Both programs impose rent and, in some cases, income restrictions for the life of the loan, according to Schultz.

“We’ve seen these programs be particularly attractive to traditional affordable borrowers, especially those with properties where LIHTC or Section 8 agreements are expiring but who wish to maintain affordable rents, or for impact funds already imposing rent and income restrictions,” commented Schultz.

More localized support for workforce housing is emerging in various parts of the country, as well.
“We’re seeing a variety of state and local initiatives utilizing tax exemptions, abatements, PILOTs—payment in lieu of taxes—in exchange for owners agreeing to restrict rents and incomes,” shared Liz Diamond, director & head of affordable originations for Berkadia.

“In many cases, these programs also require the inclusion of a nonprofit or housing authority in the ownership structure.”

North Carolina and South Carolina have introduced new initiatives along these lines, while some localities in Maryland are adopting similar approaches.

“In Florida, the state legislature recently approved an exemption targeting the ‘missing middle’ as part of the Live Local Act,” said Diamond. “However, many lenders are hesitant to underwrite this exemption. There is hope that the state will modify the legislation—potentially as early as this year—to accommodate lender concerns.”

In California, there’s a growing trend of regional housing authorities partnering with mission-driven developers to preserve existing mixed-income multifamily housing, along with other state-based initiatives.

“Executive Directive 1 in California is a recent affordable housing policy that streamlines the approval process for workforce housing by offering expedited permitting, zoning flexibility and financial incentives like abated property taxes,” cited Streit.

Priority Capital Advisory recently closed an $18.5 million loan for an ED 1 project in the San Fernando Valley. The developer was able to achieve 91 percent loan-to-cost leverage due to the project’s strong cash flow resulting from abated property taxes.

“ED 1 reduces development costs and timelines by facilitating higher-density projects and streamlined environmental reviews,” added Streit. “That makes it a critical a tool for addressing the state’s housing needs.”

Hope for the future

The Workforce Housing Tax Credit or “WHTC” is similar to the LIHTC program in that it would encourage development by providing tax credits to build affordable housing for tenants between 60 and 100 percent of area median income. LIHTC is for tenants generally below 60 percent of area median income. WHTC was introduced in Congress in late 2023, but hasn’t yet become a law.

In April of this year, the Affordable Housing Credit Improvement Act was reintroduced in the U.S. House of Representatives with 117 co-sponsors from both parties. Although it isn’t specific to workforce housing, the bill—first introduced in 2016—would expand LIHTC with the goal of financing 1.6 million affordable units.

Read the May 2025 issue of MHN.